Commercial Lease Renewal in Ontario: What Businesses Should Review Before Renewing
A commercial lease renewal can feel much simpler than negotiating the original lease.
The business is already operating from the premises. The landlord is familiar. The lease has been in place for years. Moving may be disruptive, and remaining in the same location may seem like the obvious choice.
But renewing a commercial lease is still a significant contractual decision.
The business may be committing to the premises for another three, five or even ten years. During that time, rent may increase, operating costs may change, repair obligations may become more significant and the company's space requirements may evolve.
A renewal should therefore be treated as an opportunity to reassess both the lease and the business relationship.
The question is not simply whether the business wants to stay. It is whether the lease still works for where the business is going.
1. Start With the Renewal Option in the Existing Lease
The first place to look is the renewal provision itself.
A commercial lease may give the tenant an option to extend or renew the term, but that right is usually subject to specific conditions.
The lease may require:
written notice by a particular deadline;
notice to be delivered in a particular manner;
the tenant to be free from default;
the option to be exercised within a defined window;
compliance with specific procedural requirements; and
satisfaction of other conditions before the renewal right becomes effective.
These requirements should be reviewed well before the existing term expires.
Missing a renewal deadline can put the business in a very different negotiating position.
Instead of exercising an existing contractual right, the tenant may need to negotiate an entirely new arrangement with the landlord.
Renewal planning should begin months before the notice deadline, not when the lease is about to expire.
2. Determine How Rent Will Be Set During the Renewal Term
A renewal option does not always tell the tenant exactly what the future rent will be.
Some leases provide predetermined rental increases.
Others refer to market rent, fair market value or another mechanism for determining the new rental rate.
The lease may also establish a process for resolving disagreements over the amount.
Before exercising a renewal option, a business should understand:
whether the new rent is fixed or variable;
how market rent will be determined;
whether minimum increases apply;
whether there is a maximum;
how disagreements are resolved; and
whether an appraisal or arbitration process is contemplated.
The business should also compare the proposed renewal economics with current market alternatives.
Staying may avoid relocation costs, but that does not automatically mean the renewal terms are commercially attractive.
3. Review Additional Rent and Operating Costs Again
Additional rent deserves a fresh review at renewal.
Operating expenses that were manageable when the lease began may have increased substantially over the original term.
The business should look at:
property taxes;
common-area expenses;
maintenance costs;
insurance;
utilities;
management fees;
administration charges; and
other amounts passed through under the lease.
It may also be useful to examine how these costs have changed during the existing term.
Has additional rent increased significantly?
Have major building expenses been passed through?
Are there recurring charges that were not anticipated when the business originally signed?
A renewal is an opportunity to assess the total cost of occupancy, not simply the new base rent.
4. Ask Whether the Premises Still Fit the Business
The business that originally signed the lease may be very different by the time renewal arrives.
Headcount may have increased or decreased.
The company may have adopted hybrid work.
A retailer may have changed its product mix.
A clinic may require additional treatment rooms.
An industrial business may need more warehousing, loading capacity or production space.
Before committing to another term, leadership should consider:
whether the current space is still the right size;
whether the layout supports operations;
whether parking and access remain sufficient;
whether the location still works for customers and employees;
whether expansion space may be needed;
whether part of the premises is underused; and
whether relocation would create strategic advantages.
Renewal should be a business decision first and a lease administration exercise second.
5. Reassess Repair and Maintenance Obligations
A repair provision that seemed manageable at the beginning of the tenancy may look very different several years later.
Building systems age.
HVAC equipment approaches replacement.
Roofs, plumbing, electrical systems and other components may require more substantial work.
Before renewing, the tenant should understand:
which systems it is responsible for;
whether replacement obligations exist;
whether major repairs are anticipated;
what work the landlord is responsible for;
whether repair costs can also be passed through as additional rent; and
whether the lease should be revised to better allocate future expenses.
This can be particularly important where the tenant is considering another lengthy renewal term.
A five-year obligation to maintain a relatively new system is different from a five-year obligation involving equipment already near the end of its useful life.
6. Determine Whether the Personal Guarantee Continues
If the original lease required a personal guarantee, renewal is an important time to revisit it.
The guarantee may state that it automatically applies during renewal or extension terms.
That could mean the business owner remains personally exposed for several additional years.
Consider whether:
the guarantee automatically continues;
it can be released at renewal;
it can be capped;
the guaranteed amount can decrease;
it can expire after a particular period; or
the business's payment history supports requesting more favourable terms.
If the tenant has performed successfully throughout the original term, the commercial circumstances may now be different from when the landlord originally required the guarantee.
A renewal should not automatically extend personal exposure without considering whether that exposure is still necessary or appropriate.
7. Review Assignment and Change-of-Control Provisions
The next renewal term may overlap with important future business events.
The owners may sell the company.
New investors may come in.
The business may reorganize.
Operations may be transferred to another entity.
A commercial lease can affect those transactions if assignment or change-of-control provisions are restrictive.
Before renewing, consider:
whether landlord consent is required for assignment;
whether a sale of shares triggers the provision;
whether internal corporate reorganizations are permitted;
whether the original tenant remains liable after a transfer; and
whether the landlord has termination or recapture rights when a transfer is proposed.
If a potential sale or restructuring is reasonably foreseeable, renewal negotiations may provide an opportunity to seek greater flexibility.
8. Consider Whether the Permitted Use Should Be Expanded
A business may have evolved significantly since the original lease was signed.
The original permitted-use provision may no longer accurately reflect everything the tenant does from the premises.
For example, the business may have added:
new products;
complementary services;
online fulfilment;
additional professional services;
new brands; or
different operating activities.
If the existing wording is narrow, renewal may be the appropriate time to request broader language.
The lease should provide enough flexibility to support the business during the entire renewal term, not merely reflect its historical operations.
9. Revisit Relocation, Demolition and Redevelopment Rights
A property can change significantly over the life of a commercial tenancy.
Buildings may be redeveloped.
Shopping centres may be reconfigured.
Landlords may have longer-term plans for the property.
If the lease gives the landlord relocation, demolition or redevelopment rights, those provisions should be reconsidered before another long-term commitment is made.
The tenant should understand:
when those rights can be exercised;
how much notice is required;
what happens to leasehold improvements;
who pays relocation costs;
whether replacement premises must be comparable; and
whether the tenant has a right to terminate.
For a business that depends heavily on its location, these rights may become increasingly important over time.
10. Consider What Improvements the Business Will Need During the Renewal Term
Remaining in the same location does not necessarily mean no additional investment will be required.
The premises may need:
renovations;
updated flooring;
new signage;
accessibility improvements;
upgraded electrical or technology infrastructure;
equipment replacement; or
a redesigned layout.
If the tenant is committing to another substantial term, it may be appropriate to discuss whether the landlord will contribute to improvements or provide other incentives.
A renewal negotiation can involve more than rent.
Depending on the circumstances, businesses may negotiate around improvement allowances, rent-free periods, repair work or other economic terms.
11. Review Insurance Requirements
Insurance requirements can also change over time.
Coverage limits established years ago may no longer reflect the landlord's requirements or the tenant's risk profile.
Before renewing, the tenant should confirm the lease requirements with its insurance broker.
Questions may include:
whether required limits are still appropriate;
whether additional coverage is required;
whether the landlord must be named in a particular manner;
whether the tenant's existing policy satisfies the lease; and
whether insurance costs have changed materially.
This is also an opportunity to ensure that the insurance and indemnity provisions continue to work together appropriately.
12. Consider Whether You Have Negotiating Leverage
An existing tenant can sometimes approach a renewal differently from a new tenant.
The landlord already knows the tenant's payment history.
The business may have occupied the property successfully for years.
The landlord may avoid vacancy, leasing commissions, renovation work and the uncertainty involved in finding a replacement tenant if the existing tenant stays.
That does not mean every landlord will agree to concessions.
But the tenant should understand its negotiating position before simply exercising the renewal option exactly as written.
Potential negotiation points might include:
rent;
operating cost provisions;
repair obligations;
personal guarantees;
improvement allowances;
assignment flexibility;
permitted use;
renewal rights; and
other provisions that created issues during the original term.
Renewal provides an opportunity to use what the business has learned during the tenancy to improve the next agreement.
Should You Simply Exercise the Renewal Option?
Not necessarily.
There can be a significant difference between:
exercising an existing renewal option, and
negotiating a new lease or amendment with the landlord.
Which approach makes sense depends on the existing lease, the renewal language, market conditions, timing and the business's negotiating position.
In some circumstances, preserving an existing option may be strategically important.
In others, the parties may be willing to negotiate a broader package of revised terms.
Businesses should understand their existing contractual rights before beginning renewal negotiations so they do not inadvertently weaken a favourable position.
How Early Should a Business Review a Commercial Lease Renewal?
Earlier than many businesses expect.
The lease may require notice six, nine or twelve months before expiry. Some agreements may use different periods.
Waiting until the deadline approaches can limit the tenant's options.
Starting early gives the business time to:
review the existing lease;
understand renewal deadlines;
assess market alternatives;
determine space requirements;
identify provisions it wants changed;
evaluate relocation options; and
negotiate with the landlord before making a final commitment.
For a strategically important location, planning well in advance can make a meaningful difference.
A Renewal Is a New Business Commitment
Remaining in the same premises may feel like maintaining the status quo.
Contractually, however, the business may be making another significant multi-year commitment.
That makes renewal an appropriate time to reconsider:
occupancy costs;
operating requirements;
flexibility;
personal exposure;
future growth;
potential business transactions; and
the overall relationship with the landlord.
Do not renew simply because the existing lease has worked reasonably well. Review whether the next term still makes sense for the business you are building.
Learn More About Commercial Leases and Contract Law
For more articles about commercial leases, renewals, operating costs and other issues affecting business tenants, visit Delta Law's Resources.
You can also learn more about how Delta Law reviews and negotiates business agreements through our Contract Law Services.
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Delta Law assists businesses with commercial lease renewals, lease reviews and negotiations, including rent, operating costs, renewal provisions, repair obligations, guarantees, assignment rights and other material lease terms.
